Mutual funds are investment companies that pool money from investors at large and offer to sell and buy back its shares on a continuous basis and use the capital thus raised to invest in securities of different companies.
Different investment avenues are available to investors. Mutual funds also offer good investment opportunities to the investors. Like all investments, Mutual Fund Investments also carry certain risks. The investors should compare the risks and expected yields after adjustment of tax on various instruments while taking Mutual Fund investment decisions. The investors may seek advice from experts and consultants including agents and distributors of mutual funds schemes while making mutual fund investment decisions.
Mutual funds have an upper hand in terms of diversity and liquidity at lower cost in comparison to bonds and stocks. The popularity of mutual funds may be relatively new but not their origin which dates back to 18th Century.
As we know, mutual funds investment offer the opportunity for a number of investors, who share a similar investment objective, to pool their money and have it invested and managed by professional investment managers. A fund may be invested in stocks, bonds or cash and cash equivalents. The stocks these mutual funds have are very fluid and are used for buying or redeeming and/or selling shares at a net asset value. Mutual funds posses shares of several companies and receive dividends in lieu of them and the earnings are distributed among the share holders.
Mutual fund investments are no different than any other investment; before you invest, you must know your own investment goals and objectives. Two of the biggest mistakes people make are failing to match their goals with the fund’s goals, and failing to inquire into the performance and reputation of the fund and its manager. Before you choose a mutual fund to invest, establish your own financial goals, decide how much risk you can afford to take and consider the cost, services and track record of the mutual fund.
Why invest in Mutual Funds?
Professional Management: Mutual funds offer investors access to full time, professional money managers who have the expertise, experience and resources to actively buy, sell and monitor their mutual fund investments.
Affordability: Initial investments in most mutual funds are reasonable for the average investor and the requirement for additional investments are lower than initial investment requirements.
Diversification: An investment in a mutual fund generally includes a number of different securities. For e.g. diversified stock fund portfolios usually hold an array of stocks representing different companies, different industries and perhaps even different nations. Diversification can help reduce the financial risk inherent in investing. If one mutual fund investment decreases in value, another investment in the portfolio may increase.
Flexibility: Many mutual funds are part of a – family of funds and you can exchange your shares from one fund to another in the same family when your investment objectives change. For example, Franklin Templeton Investments offers Franklin, Templeton and Mutual Series funds.
Liquidity: This means it is easy to withdraw some or all of the money you’ve invested. With proper written notice you can usually get the money you’ve requested within 7 business days. Of course, the value of the shares you redeem may be more or less than your original cost.
Selecting the Best Mutual Fund for Investment
- Draw down your mutual fund investment objective. There are various schemes suitable for different needs. For e.g. retirement plan, capital growth etc. Also get clear about your time frame for mutual fund investments and returns. Equity funds are not advisable for short term because of their long term nature. You can consider money market and floating rate funds for short term gains.
- Once you have decided on a plan, collect as much information as possible on it from different sources offering them. Funds’ prospectus and advisors may help you in this.
- Pick out companies consistently performing above average. Mutual funds industry indices are helpful in comparing different funds as well as different plans offered by them. Some of the industry standard fund indices are NASDAQ 100, Russell 2000, S&P fund index and DSI index. Also best mutual funds draw good results despite market volatility.
- Get a clear picture of fees & associated cost, taxes for the short listed mutual funds you are going to invest in and how they affect your returns. Best mutual funds have lower cost out go.
- Investment in the best mutual funds maximizes returns and minimizes risks. Sharpe Ratio explains whether a fund is risk free based on its expected returns compared against a risk free money market fund.
- Some mutual funds have the advantage of low minimum initial investments. You can start investing even with 100 pounds a month. This is advisable for building asset bases over a long period with small regular mutual fund investments.
Is Mutual Fund Investment Risk Free?
No investment is insulated from risk. To begin with, we can say mutual fund investments are relatively risk free in the way they invest and manage the funds. The mutual funds investment from the pool is well diversified across securities and shares from various sectors. The fundamental understanding behind this is not all corporations and sectors fail to perform at a time. And in the event of a security of a corporation or a whole sector doing badly then the possible losses from that would be balanced by the returns from other shares.
This logic has seen the mutual funds investment to be perceived as risk free investments in the market. Well, this is not entirely untrue if one takes a look at performances of various mutual fund investments. This relative freedom from risk is in addition to a couple of advantages mutual fund investments carry with them. So, if you are a retail investor and planning an investment in securities, you will certainly want to consider the advantages of investing in mutual funds.
What are the Advantages of Mutual Fund Investments?
- Lowest per unit investment in almost all the cases
- Your investment will be diversified
- Your mutual fund investment will be managed by professional money managers